Earnings Call Transcript - TFIN Q1 2023

Operator, Operator

Good morning. It's 9:30 here and a typical spring day in Texas. It's time for our first quarter earnings call, so let's get started. I want to begin by thanking you for joining us this morning. You'll notice that the set looks a bit different today, and we are excited to present our new desk. This desk was built by Cody and Chris at the TBK workshop, along with participants from our first Forge of the Future program. This workshop is a maker space we've created that focuses on community outreach through workforce development and educational initiatives. Another change you may notice this morning is that Dan Curtis, our Chief Operating Officer at TriumphPay, will be substituting for Melissa. Melissa's daughter is finishing her active duty service in the Navy, and she will be attending a family celebration onboard the USS Carl Vinson. Given this once-in-a-lifetime opportunity to honor her daughter's service, she wanted to be present for this special event, and we fully support that. Dan brings a wealth of industry experience and a solid understanding of the market dynamics and opportunities affecting TriumphPay. So please join me in welcoming him today. Melissa will be back with us in the studio for next quarter's call. Speaking of which, let's get to business. Last evening, we published our quarterly shareholder letter. That letter and our quarterly results will form the basis of our discussion today. However, before we begin, I'd like to remind you that this conversation may include forward-looking statements. These statements are subject to risks and uncertainties that could lead to actual results differing from our expectations. The company has no obligation to publicly revise any forward-looking statements. For more details, please refer to the safe harbor statement in our shareholder letter published last evening. All comments made during today's call are subject to that safe harbor statement. With that, I'd like to turn the call over to Aaron for a welcome and to kick off our Q&A. Aaron?

Aaron Graft, CEO

Thank you, Luke. Good morning. Thank you for joining us. I hope that you found the letter we published last evening informative and helpful. I'll make a few opening comments, and then we'll turn the call over for questions. Depending on your position related to Triumph Financial, I have one piece of bad news and three pieces of good news. So let's start with the bad news. The freight recession is here, and it's real. The softness in the market took a toll on our earnings for the quarter. Further, I think investors should know that the market has remained soft at the beginning of the second quarter. If the market stays this soft for a long period of time, many companies in transportation will experience financial distress. We don't have any projections for how long or how deep the recession will be. That is the bad news. Now for the good news. Even if the freight market stays soft, investors should expect Triumph Financial to remain profitable. Freight is the biggest part of what we do, but it is not the only thing we do. Further, we were reducing long-term freight risk when the market was the frothiest two years ago. For example, we slowed our growth in equipment finance in the last few years because we wanted to be particular on credit. We didn't know when the market would turn, but we never forgot that the freight market is cyclical. We expect to navigate this print cycle just like the ones in the past. And past experience has taught us that bad markets often present compelling opportunities. The second piece of good news is that all of the ills that have caused trouble for the banking industry in the last 60 days are just generally not true of us. We have ample capital and liquidity. We take very limited interest rate risk, and we have avoided growth in the areas most likely to experience credit risk. And now for the final piece of good news, do not let the falling freight market confuse you on TriumphPay's performance. You will not see us use this freight recession, however long it may be, to walk back our guidance on profitability in that segment. To the contrary, we expect to do better. Depending on which markers you use, the truckload freight market is down between 10% to 30% over the past year. And the brokered freight market is towards the higher end of that range. In that same timeframe, TriumphPay has grown its volume by over 7%. In other words, we're taking market share in a falling market. But more importantly than growing volume, we have improved our EBITDA margin by over 50% in one quarter. That improvement is not episodic. We always believe that the float we created in the network would be valuable; we just needed a different interest rate environment to demonstrate that value. That rate environment has now arrived. Last quarter, we noted that TriumphPay was self-funding as a segment for the first time. For this quarter, TriumphPay generated excess funding, investing that excess funding at the Fed funds rate created interest income of over $1.5 million for the quarter. Second, certain upfront expenses in TriumphPay burn off over time. It is difficult and costly to onboard new clients, but that effort pays off over the long run. As a result, we are more bullish than ever on the long-term value of the network. And for the team, the Board, and our long-term investors, we think that is the best news of all. And so with that intro out of the way, we'll now turn the call over for questions.

Operator, Operator

Our first question comes from Matthew Olney from Stephens.

Matt Olney, Analyst

Can you guys hear me okay?

Aaron Graft, CEO

We hear you fine, Matt.

Matt Olney, Analyst

We previously discussed that TPay was set to add four new brokers of significant size to the system in late fourth quarter or early first quarter. Given the current market headwinds, it’s challenging to recognize the benefits of these new brokers. Can you elaborate on the ongoing process and the adoption of the TPay product with those dual brokers, and how that aligns with your internal expectations?

Dan Curtis, COO

So in Q1, we signed one Tier 1 to audit and went live as well as one Tier 1 or Tier 2 in audit. We also went live with four Tier 2s in the first quarter, and our pipeline of both Tier 1s and Tier 2s for payment audit and network remains strong. We expect to bring more on in the second quarter as well as the third quarter. And we can see the clear path of growth for this year based on the Tier 1s and Tier 2s that we have in integrations right now.

Aaron Graft, CEO

And Matt, to add to that, since I was the one who made that prediction, the Tier 1s that we thought would be on the network by this quarter, a few of those have slid to next quarter. And so that volume is yet to come. And that's why we're encouraged that we're able to grow EBITDA before even that volume comes because it proves that we're monetizing the network at a rate that exceeds what our original expectations were. So the pipeline remains full, and we continue to work, as Dan said, on bringing those large brokers and all brokers, frankly, onto the network.

Matt Olney, Analyst

And just as a follow-up to that, Aaron, why do you think some of those are sliding? Is it more market conditions? Is it more something else? Any color on kind of why some of those Tier 1s have slid into Tier 2?

Aaron Graft, CEO

Tier 1 brokers have not transitioned to Tier 2 based on our assessments. We define a Tier 1 broker in a stable market as one with over $500 million in transportation spending. The reason they are moving down is that integrating with TriumphPay is complex, requires substantial technical resources, and cannot be implemented instantly. We have been absorbing the upfront costs, which will diminish over time. We have the necessary technical resources ready for integration on our end, but we also need our brokers and payors involved in the network to have their technical capabilities in place. There is always competition for these resources because when payments go live, they need to be executed flawlessly, and often tech projects do not meet their deadlines. However, our pipeline remains strong, and as soon as we can announce the next progress, likely this quarter, we will do so. Each announcement increases volume in the network.

Matt Olney, Analyst

That's helpful. And just one more on TPay here. Just about the various fee components for TPay. I know the fees are a smaller number today within TPay, but I'm curious about the types of fees that are currently running through the system today versus the types of fees that we could see as volumes ramp up, whether it's syndication fees, subscription fees, network fees. Just any color on the fees today versus more of the fees on to come.

Dan Curtis, COO

So we currently have subscription fees in our newer brokers that have signed on to our network and on to our invoice and payment audit processing. We also have network fees for factors now running through the system. We have our traditional QuickPay revenue share as well, which is the predominant source of our revenue still. But again, we have transitioned new clients to a subscription fee basis, we're repricing some existing clients to subscription fee, have our first network fees running through from a factor perspective, and we are recognizing more interest income than we have previously by creating our own funds.

Operator, Operator

Our next question comes from Gary Tenner from D.A. Davidson.

Gary Tenner, Analyst

I wanted to ask you, Aaron, about something you've previously mentioned regarding the sell-through of the value proposition to large brokers during slower growth or freight recession periods. As we begin to see this evolve, could you elaborate on how those conversations have changed? Is there an increased openness to the value proposition?

Aaron Graft, CEO

Absolutely, that's a great question, Gary. There are three key things we are discussing now that weren't as prominent a year or a year and a half ago when freight was thriving. First, in a declining market, everyone is looking for greater efficiency. The discussion around efficiency in the back office is receiving much more interest now, as margins are tight, compared to a year ago. Second, it's noteworthy that a year and a half ago, larger brokers generally did not require much balance sheet assistance. Currently, we find opportunities to provide financing to support them in enhancing liquidity to meet their targets, which wasn't a conversation we had 18 months ago. Lastly, the issue of fraud has become increasingly significant. The rise of fraud in transportation is notable, with organized crime targeting this large and fragmented industry. Hence, our capability to help mitigate fraud is now central to every discussion we have. Consequently, due to these three factors and the passage of time, along with demonstrating our network capabilities, our conversations are definitely progressing.

Gary Tenner, Analyst

Aaron, when you talk about the financing part to the brokers, do you mean them wanting to not use their own balance sheet to fund kind of the QuickPay piece of it? Or are you talking about direct financing or other kind of credit needs to the brokers?

Aaron Graft, CEO

Every broker operates differently. Some may not require our balance sheet, while others do, depending on their structure. Regarding the QuickPay revenue, we have always been open to expanding the QuickPay program for freight brokers. They can maintain that balance on their balance sheet, for which we charge a fee to manage the program, or if they prefer, we can hold it on our balance sheet and return a share of the profits to them. Now, as for the freight broker market, it is valued at $135 billion. However, it's important to recognize that this figure represents the amount spent by brokers on transportation each year. Additionally, these brokers manage $150 billion to $160 billion in accounts receivable for their clients. As TriumphPay evolves and adapts to their needs, our capacity to assist with accounts receivable presents a significant growth opportunity. This quarter, you will see us providing financing to a select number of brokers; not all require this, but some do. This is a topic we are increasingly discussing, unlike two years ago.

Operator, Operator

Our next question is from Joe Yanchunis of Rubin James.

Joseph Yanchunis, Analyst

So I want to start on expenses. In the 2Q expense guide of minimal sequential growth, is that based on the reported $89.3 million from the first quarter? Or do we need to adjust for any certain one-timers? And then also in the past, you've given us some expense goalposts for the December quarter. And I was wondering if you could provide that at this time.

William Voss, CFO

The run rate expenses moving forward should be based on the $89.5 million reported in Q1. As for the expectations for the end of the year, it's difficult to predict at this moment because we plan to be flexible. We are intentionally limiting some expense growth in the near term due to the current state of the freight market and the effects on our revenues. If our revenues remain stable or decline further because of the freight recession, those expenses will stay flat. Conversely, if we see revenue growth and an improvement in the freight market in the latter half of the year, our expenses may start to increase slightly. I understand this makes it somewhat challenging for you to forecast, but we will be agile and careful in managing expenses going forward.

Joseph Yanchunis, Analyst

Got it. Appreciate it. And then in your prepared commentary, you discussed that by moving the supply chain financing solutions from Triumph Business Capital to TPay, it will shift $10 million in EBITDA to TPay. What's the timing on this transition? And do you have a sense for the revenue and expense components of the EBITDA?

Dan Curtis, COO

So the timing of this transition is in the second quarter. That business produces a high return, and we will be moving that full operation and business into TPay this quarter. Again, we expect on an annual basis for it to create about $10 million in EBITDA and look to grow that over time.

Aaron Graft, CEO

And Joe, we will call that out for you, right? We want to be transparent about that, that's not organic revenue. That's not part of the EBITDA walk forward. So when that shows up in the next quarter, we'll call it out for you on the revenue and expense so you can separate that from organic margin that's coming into the business.

Joseph Yanchunis, Analyst

Appreciate it. And then just a couple of more for me here. And what blended interchange fee are you currently signing up new customers at TPay? And how should this trend moving forward? And then as we think about the Truckstop Pay client acquisition, what kind of blended interchange fee do you expect them to join the network at? It looks like in the first quarter, it was about 13 basis points, which at the same rate would imply this transaction would add about $1 million in annualized revenue. Am I thinking about that correctly?

Dan Curtis, COO

You want to take that one?

Aaron Graft, CEO

I believe you're calculating the client situation accurately. When we mention interchange fees, we refer to subscription fees, network fees, and all charges related to both sides of the transaction. In the long term, it's important to differentiate between network and non-network transactions. We generated $20.3 billion in payments during the quarter and applied fees accordingly. For network transactions, the current market pricing is over $5, which is shared by both transaction parties. This figure may vary based on different volume levels, but it serves as a good estimate. Regarding the load pay customers, their historical pricing is not comparable to our model at TriumphPay, as that was simply a payment mechanism. New customers will generally be onboarded at our full retail pricing. We need to further analyze how this affects interchange or network fees in relation to total volumes before providing a specific forward-looking number, as it is closely linked to the growth of network transactions. That is the only metric that increased in a quarter when all others declined. As network transaction volumes rise, the fee per transaction also rises because we provide greater value. To answer your question precisely, we need to consider what proportion of our total volume will become network transactions.

Joseph Yanchunis, Analyst

So I just don't think we have components to kind of back into that. So maybe you can help me out, could you break down the subscription network fee and QuickPay fee that TPay generated in the first quarter?

Aaron Graft, CEO

I don't know if we have those exact numbers available to share today. If it's something the market is interested in understanding, we can look into it and see if we can provide that information later. It’s not a simple one-time number and is influenced by both legacy and new clients. So, we won’t share those specific details right now, but we will do our research and come back with insights that clarify both our past performance and our future plans, and we will communicate that to the market.

William Voss, CFO

Joe, if I can add to that, there is a piece of that you can see today. When you look at our segments reporting in the letter that we sent last night, the interest income of $2.7 million that you see in the payment segment is related to the QuickPay part. The noninterest income, which amounts to $3.9 million to $4 million, will be a combination of all other fees, but we have not provided a more detailed breakdown of that.

Operator, Operator

Our next question comes from Timothy Switzer from KBW.

Timothy Switzer, Analyst

I have a quick question regarding the onboarding process, which you mentioned is quite technical and time-consuming. Can you provide some details on the initial costs for a broker signing up for TPay? I'm referring not only to the technology expenses but also to the overall manpower required. Additionally, what portion of these initial costs is covered by Triumph compared to what the broker bears?

Aaron Graft, CEO

For large brokers with custom-built TMSs, the onboarding cost can be significant, reaching seven figures and potentially approaching $2 million, depending on how they allocate resources. This is a major decision for them, and we typically do not absorb any of these expenses; it falls on the broker to calculate this cost as part of their long-term value assessment of the network. In contrast, smaller brokers using off-the-shelf TMSs incur much lower costs and complete the onboarding process more quickly.

Timothy Switzer, Analyst

That's helpful. I'm not sure if this is a reasonable question, but if the freight recession continues and spot rates potentially decrease along with a drop in volume, what is the lowest point you expect factoring volumes to reach? Would you be open to taking on some market share if volumes decline?

Aaron Graft, CEO

Tim, why don't you start with that one?

Tim Valdez, Executive

So Tim, it's really difficult to predict because the challenge we run into has historically been through these cycles five or six times in my career in the factoring space. And so it's really difficult to understand when something is going to end, and what the impact is. We are certainly above the 2019 levels and hope to maintain that, but it's so unpredictable, and I don't really know where it's going to land.

Aaron Graft, CEO

And regarding your question about market share, we are committed to our previous statements. We estimate our market position is about 15%, and that’s our goal moving forward. While the market has contracted, we believe we will recover a significant portion of the lost revenue through the supply chain financing we provide to the brokerage industry, especially as TriumphPay expands its reach. The credit risk remains relatively unchanged. If growth occurs, it will be through these avenues rather than at the expense of our competitors. We intend to remain competitive in factoring by offering excellent service and products, but we will not use this situation to compete against our network partners. However, we do expect to see some revenue return through our supply chain financing opportunities in the brokerage market.

Operator, Operator

Our next question comes from John Rau at Wells Fargo.

John Rau, Analyst

This is John on behalf of David Shaw. I have a question about the net interest income from TriumphPay that was generated this quarter due to the excess funding in that segment. Can we expect this to be sustainable on a quarterly basis, or was it more of a one-time occurrence influenced by specific factors this quarter?

Aaron Graft, CEO

No, we would expect as volume goes up, float goes up. So it was not episodic. You've just seen us bring on a significant amount of volume and bring all the payments back into the network. The one thing that may happen is as TriumphPay has opportunities to provide supply chain financing to network constituents, we may not be in an excess funding position such that you're getting Fed fund rates on those excess balances. If that is true, you should expect the revenues we will generate on those funds to be much higher than Fed fund balances.

John Rau, Analyst

Okay. And then I guess, just looking at the trend in invoice prices, could you talk about kind of the trend throughout the quarter? Like what was the average for like February or March? And kind of how does that compare to what you're seeing today? I know it's kind of hard to predict the things moving around so quickly, but just a little bit more color on the last few months you've been seeing in that?

Tim Valdez, Executive

We had a fairly decent month in January, but then we experienced a decline in February and March. This was largely due to the average price of fuel dropping. Overall, prices continued to decrease throughout the first quarter. While there has been some volatility, it remains relatively soft as we speak today.

Aaron Graft, CEO

Average invoice prices for April so far are just under $1,800. They may increase or decrease, and we don’t make any predictions about that. This price level is close to the point where many truckers struggle to break even on truckload operations due to limited long-haul truckload exposure. Our blended portfolio includes some shipper exposure, which supports prices higher than what the spot market suggests. From experience, low prices often lead to further declines. We've seen a reduction in clients in our factoring division from 12,000 to around 10,000, with some leaving the industry entirely while others have moved to larger carriers. Conditions could worsen, but predicting that is not within our capabilities. However, we believe that demand will persist, and as capacity leaves the market, it will create a tighter market, which is generally favorable for our business. Fuel costs, constituting 20% to 30% of expenses, remain unpredictable due to factors beyond our control, like OPEC decisions. Our goal is to maintain value and profitability regardless of whether invoices are at $1,780 or $2,400. In five years, I believe we'll look back on this period and recognize the temporary challenges as opportunities that ultimately benefit our enterprise more than any short-term earnings decline.

John Rau, Analyst

Okay. That's very helpful. And then just one more quick one for me. There was some talk of seeing some better risk-adjusted returns in the community bank last quarter. I'm just kind of wondering if that's still something that you're seeing today or if we should expect growth in the community bank still in 2023?

Todd Ritterbusch, Executive

Yes. I'll take that one. So yes, we were seeing better economics, better risk-adjusted returns in the fourth quarter. We've sort of seen a plateauing in returns that are available with new deal flow. And so I wouldn't say that we're more excited today about the pricing than we were in the fourth quarter, but we continue to monitor it. So if we do see better risk-adjusted returns on the right credits, we'll be ready to step in.

Operator, Operator

Our next question comes from Joe Yanchunis from Raymond James, again.

Joseph Yanchunis, Analyst

Just had a couple more for me. So kind of going back to Matt's question. On the 2Q '22 call, you announced the $15 billion in annualized payment volume that was being integrated into TPay. So I understand that the market downturn has caused a number of changes, what percent of that volume has already been realized?

Aaron Graft, CEO

Less than 30%.

Joseph Yanchunis, Analyst

Okay. And spot rates aside...

Aaron Graft, CEO

So Joe, you could interpret that as either bad news or good news. Aaron, you might say I'm not great at predicting timing, and I'll take responsibility for that; things took longer than expected. The positive aspect is that we're increasing EBITDA even without having reached that volume yet. That's the current situation.

Joseph Yanchunis, Analyst

Absolutely. I'm just trying to understand the volume component kind of moving forward. And I did see that as of last week, C.H. Robinson did offer spot rates that still trough this month. Obviously, that's just another prediction that's out there. But one of the things I was hoping you could help me with is how have volumes changed throughout April because they were down pretty handily in the first quarter?

Tim Valdez, Executive

Yes. One of the most interesting aspects is that when rates reach their current levels, carriers become very selective about what they transport and when. If the conditions aren’t ideal, they may choose to not utilize certain assets. Additionally, they focus on using the most efficient equipment available. If they have older equipment, they may hesitate to operate it and reduce capacity when the market conditions reflect the current situation. While there are definitely opportunities on the horizon, it's challenging to make accurate predictions about them.

Aaron Graft, CEO

And we would expect, Joe, that as long as rates stay low, utilization will stay low, right? People don't like driving and losing money to do so. And so when you build a model to try to predict our future earnings, you can't just plug spot rates; you have to think about utilization, which I know you all have followed us long enough to do that. But the point is the drivers are getting paid less, so they're driving less. And those two things work together.

Operator, Operator

And my next question is from Brad Milsaps from Piper Sandler & Companies.

Bradley Milsaps, Analyst

You guys have addressed almost everything. Just had a quick follow-up question on the bank, and I apologize if you addressed it. But just curious how much longer you can kind of hold deposit rates as low as they are? I know last quarter you said you were just really exception pricing kind of on a one-off basis. But obviously, very low relative to the industry, I get that you only need tons of funding. But just curious what kind of project point that could be out there?

Aaron Graft, CEO

Yes, go ahead, Todd.

Todd Ritterbusch, Executive

We are currently managing deposit rates on an exception-only basis, and I don't foresee a change in that approach anytime soon. We are confident in our position and have not noticed an increase in the number of rate exception requests; the requests we are receiving have remained stable. However, we anticipate ongoing pressure on deposit rates. We are significantly below the market's peak rate, which means we will need to continue making exceptions over time to retain our deposits, prioritizing those based on our client relationships. I do expect our deposit costs to rise, potentially at a faster rate than what you've seen in recent quarters. We'll do our best to manage this while ensuring we do not experience a substantial outflow from our core deposits.

Aaron Graft, CEO

Brad, as I mentioned earlier, Todd and the team are doing an excellent job with that. Several factors are in our favor. First, our deposit costs will increase, and there's no doubt about it. We have performed well and will likely continue to perform well compared to our peers, but it's important to note that last quarter's performance shouldn't be seen as something we can maintain indefinitely at that level of discount to existing Fed funds rates and other rates. Factors that work in our favor include a highly fragmented deposit base without any liquidity concentration, growth in our noninterest-bearing deposits due to the float generated within the network, and our philosophy that we aren't compelled to grow assets indiscriminately. We believe in focusing on growth that maximizes returns for our investors. This allows us the discipline to avoid excessive loan growth that requires funding regardless of costs. This approach, combined with the fragmentation of our deposits and the float we create, positions us to continue outperforming our peers when it comes to deposit beta.

Bradley Milsaps, Analyst

Great. That's helpful. And Aaron, I know there are a lot of new parts, and you are trying to address this in some ways. But any predictions, I know in the past, you've given on total revenue this year, Triumph Business Capital. Just kind of curious, I know it's tough with all the moving parts, but just curious if you could offer any color or guidance there around kind of how you're thinking about revenue this year.

Aaron Graft, CEO

If I tried to make predictions, my CFO would stop me. Honestly, I have no idea what will happen. Eventually, I believe the market will adjust, capacity will decrease, shippers will deplete their excess inventory, and demand for freight will increase. This process could occur sooner than expected, but I can't say whether it will be this year or next. We have provided expense guidance, which is within our control. As mentioned in the letter, we are prepared to accept revenue fluctuations as a trade-off. We aim to avoid credit, liquidity, and interest rate risks. Given the nature of our business, now is not the time to make forecasts. I can assure you that we will remain profitable regardless of the circumstances because we are well-positioned compared to others, and our growth engine in TriumphPay supports our efforts. I hope that answers your question, but I can't provide any specific predictions for you, Brad.

Bradley Milsaps, Analyst

No problem. It's tough for us, too. Are you finished with all your capital actions? You had the ASR, but how should we consider periodic buybacks going forward? Additionally, do you have any thoughts on eliminating those higher-cost trust preferreds? It seems like a straightforward way to generate earnings. That's it for me.

Aaron Graft, CEO

Yes. And I'm glad you asked that question about capital because I think that's something investors wonder about. So as a reminder, the capital that was required to complete the ASR left the building last quarter, right? That capital went out the door. We're not done with the ASR that we're in the market right now, and we'll find out sometime in the second quarter, I'm sure. It wouldn't surprise me if they're in the market buying today, right? It would be a good opportunity for them. So after the end of this quarter, we would have over $130 million of excess capital. So there are only two uses for that: Number one, we want to make sure we're positioned, and at least have the authorization to do so that should our shares fall because people are concerned about near-term earnings and missing long-term opportunities, you should expect we will be in the market because we believe in what we're doing, and we can see it. The second thing that we would do is because of the distress in the freight markets, because venture capital funding and debt has dried up, there are opportunities for us to partner with, invest in and perhaps even acquire companies which augment what TriumphPay is doing. And so we continue to look at those opportunities. Those are the two things as we think about this excess capital, which will continue to grow, we expect over the year, of how we would use those funds.

William Voss, CFO

And Brad, I'll address the second part of your question about the trust preferreds. Simply put, we are not going to call those. First, it would create a $10 million gap in our capital base because we have those securities recorded at a discount from when we acquired the banks that originally issued them. Second, it's valuable Tier 1 capital that cannot be replaced in this market; that structure is no longer available, and we will continue to benefit from it moving forward. Additionally, it is important to note that we remain asset-sensitive as a bank overall, and those are floating-rate liabilities—some of our only true floating-rate liabilities. Therefore, if interest rates start to decline, having those floating-rate liabilities on our balance sheet will actually benefit us. So you can expect those to remain in place for the foreseeable future.

Operator, Operator

There are no further questions on this line at this time. So we'll now hand over to the phone line for further Q&A. Thank you, Melinda.

Operator, Operator

We go to our first question from the line of a private investor, PM Kumar.

Unknown Attendee, Investor

Can you guys hear me?

Aaron Graft, CEO

Yes.

Unknown Attendee, Investor

Aaron. I have a question for you. In the letter, you mentioned TriumphPay audit and TriumphPay payment annualized volume represents over 20% of the brokered freight market in the U.S. So the remaining 80% of the volume in the market, is that through legacy payment processes with manual checking and payment? Or are there similar offerings similar to TriumphPay that customers are using? And if yes, can you talk about the competitive positioning of TriumphPay?

Aaron Graft, CEO

Yes, that's a great question. To the best of our knowledge, there is no one else in the market providing payment solutions for the brokered freight sector like we do. There are traditional providers that offer audit services for brokers, but I'm not aware of any that are publicly traded, so I can't comment on their audit volumes. What I can share is that when it comes to audit and payment, we handle one out of every five transactions in brokered freight. No one else is managing payments at such scale. While there are other companies offering audit services—of which I can name at least five—there are likely more. I believe we are among the largest, if not the largest, in providing audit services for brokered freight, although I'm not entirely certain that we hold the largest position.

Unknown Attendee, Investor

I have a follow-up question on that. Currently, the volume we handle with TriumphPay taxes is about 20%. What do you anticipate that percentage will be in the next two to five years? Based on your current discussions with customers and their experiences, as well as future improvements, what market share do you expect? I understand no one can predict the future exactly, but can you provide a rough estimate of the team's expectations?

Aaron Graft, CEO

Yes, we would love to capture the entire market, though we understand that this is not feasible. In discussing our approach, Dan may correct me if needed. We acknowledge that the top 30 freight brokers, each with over $500 million in spending, account for approximately 40% of the market. The top 1,000 freight brokers control about 90%. Below this threshold, there are around 7,000 or 8,000 smaller freight brokers forming the long tail of the industry, some of which are our clients. Focusing on the Tier 1 brokers, we are currently integrated with 18 of the top 30 for audit, payment, or both. We have previously mentioned that more Tier 1 brokers are set to join our platform by year-end, increasing our penetration in this segment, which comprises around 40% of the market. I believe that as Tier 1 brokers recognize the efficiencies and value we provide, the Tier 2 and Tier 3 brokers will begin to follow suit. This is largely because they all utilize the same carriers to transport their loads. When a new Tier 1 or Tier 2 broker partners with us, we have already processed payments for 95% of their carriers. Additionally, we can inform them about carriers that may not be hauling their loads, offering valuable insights that have not been widely accessible before. I am confident that the actions of Tier 1 brokers will influence the rest of the market, and we continue to onboard mid-sized brokers as well, each of which plays a significant role. Dan, do you have anything to add?

Dan Curtis, COO

Yes, I believe our pipeline and the current conversations we are having can enable us to increase that percentage to between 30% and 50% over time. Our internal goals over the next two years align with those figures. We have a clear plan to achieve this, and we can anticipate the growth that is coming for the remainder of this year. As we start to recognize the amount of freight we manage through audits, payments, and the overall network, that percentage will move closer to 50%.

Unknown Attendee, Investor

If I may ask one more question. Are there any new offerings that the team is looking to in conjunction with TriumphPay, anything that the team can acquire that would strengthen the network as a whole or any new offering that the team is trying to build internally or opportunity areas that would strengthen the network of TriumphPay?

Aaron Graft, CEO

Yes. We're not prepared to talk about those now, but we have things that we think about as money moves from the shipper to the broker, to the carrier, the carrier spend. There are things we can do. And when we're ready to talk about those things, the market will hear.

Operator, Operator

It appears we have no further signals. I will now turn today's program back over to our presenters for any additional or closing remarks.

Aaron Graft, CEO

Thank you all for joining us. We look forward to seeing you next time. Have a great day.

Operator, Operator

Thank you. This does conclude today's program. We thank you for your participation. You may disconnect your lines at any time.